GWEN IFILL: The markets were in dramatic freefall for much of the day today, recovering in rapid fashion only at the very end of a very volatile session. The Dow Jones Industrial Average has now dropped more than 700 points just since last week. But why? Here to help us out with that question is Diane Swonk, chief economist at Bank One, a commercial bank; and Mark Zandi, chief economist at Economy.com, an Internet site for economic and industry analysis.

Diane Swonk, first we were down, then way down and then up again. What happened today?

DIANE SWONK: Well, what we saw at the end of the day — I’m getting feedback, I’m sorry — at the very end of the day we saw program buying bring the market back very rapidly. In fact, all of the buying at the end of the day, there was no selling, there was only buying. And I think that’s very important.

What we also saw was individual investors who were originally bailing from the market in the beginning of the day and now individual investors have been the ones who have been leaving the markets, forcing many mutual funds to unload their institutional positions. And that’s very important because it was the individual buyers that were buying at the top of the NASDAQ bubble, at the top of the ’99 market bubble, and it’s the individual buyers usually what when they’re moving en masse, it is usually a sign the market is about to turn the other direction.

It is an ironic sign but one I find nonetheless a little comforting. Also, the program buying that was going on I find a little comforting because at some point in time frankly fundamentals kick in and these stocks are good buys.

GWEN IFILL: What do you mean by program buying?

DIANE SWONK: What they had overall programs were programmed to at certain levels of the indices and certain levels of stocks — it was very much in the fundamental stocks — they would kick in automatically and buy on those stocks. It’s very important because it means at some point in time during the course of the day, stock prices got so low in the broader indices and in individual stock groups that actual programs were kicking in automatically to buy because the firms decide add head of time if these prices got that low, we have to buy on them.

GWEN IFILL: Okay. Mark Zandi, what is your take on that?

MARK ZANDI: I think it’s fear. I think investors were heading for the doors at the same time; investors were fearful that corporate America are not on the up and up. I think they fear that policy makers are not up to the task, that they haven’t done enough and that they can’t do anything to stem the selling. So I think it’s at this point just raw fear.

GWEN IFILL: Were there any particular sectors, any particular businesses that were driving this fear?

MARK ZANDI: No, I think it’s fairly broad-based from obviously the technology stocks but financial companies, just across the board. I think there was selling until the very end.

GWEN IFILL: Diane Swonk, there was good news people said today, there was supposed to be good reaction on Coca-Cola’s announcement that it would not count stock options as profit. There was supposed to be good reaction to the Pharmacia-Pfizer merger. But that didn’t reflect the way people predicted they would. Why is that?

DIANE SWONK: What is happening right now I agree 100% with Mark that fear is just overwhelming the markets and basically this sort of mistrust of corporate America. But I really think, especially the move by Coca-Cola, we’re seeing a sea change, where companies that feel they’re already on the up and up, they’re taking a preemptive strike to look more more ethical to prove their own ethics to the investor out there.

I think will you see more of that. At one point in time, O.J. Simpson was on an audit committee of a board. I don’t know what his credentials are but my guess is that he is not qualified. That’s a guess; I don’t want to be libelous here but there are many people who were not qualified on audit committees of boards.

I see companies that I’m talking to advertising the quality of their audit committees and their ability to, with their independent auditors or independent accounting firms, that they’ve had background checks run now, not only on people on the board but also on senior management and that’s becoming an advertising thing within the industry. So that’s a real sea change of corporate America that sort of doesn’t want to be stained by the bad apples that have already been out there; they don’t want to be thrown in the same bunch.

They’re trying to take the bull by the horns themselves and say listen, we know changes are coming down the road and we don’t fear them. If we’re honest, we want to be held accountable. We’re ready to stand up.

GWEN IFILL: Let me ask Mark Zandi about that. If that’s what’s happening, then why isn’t that effort to be purer than the driven snow that Diane was just talking about, Diane Swonk was just talking about, why isn’t it reflecting itself with renewed investor confidence on Wall Street?

MARK ZANDI: That’s only started. I think every CEO in America probably is scouring their income statement and their balance sheet right now seeing if there are any problems there. All CEOs of major companies are going to have to sign on the dotted line and vouch personally for the integrity of those reports. And I think when they finally do in fact sign on the dotted line, that’s when investors will become more comfortable. We are only in the beginning of this process. Coke is just one example in the sea of other very bad examples.

GWEN IFILL: Well, the president today, let’s continue with you, Mark Zandi, the president today spoke about this concern and his concern for the economy and while he was speaking, the market continued its slide. I guess there are two-and part of his reasoning, as we heard in the news summary was that we are still suffering the effects of a hangover from the ’90s binge. Is that what you see in part happening here? And is there any connection between when the chief executive of the company– of the country speaks and the market slides?

MARK ZANDI: Well, yeah, that’s definitely part of it. I mean we are still struggling with the remnants of the bursting of the bubble that formed over a period of several years. And it’s still having these tremendous financial market economic impacts. That’s clearly part of it. But part of the problem is that policy makers just don’t really have the tools to combat this.

It’s a very difficult pernicious problem that the Bush Administration, Congress and the Federal Reserve Board have limited ability to tackle. So I think investors sense that; they fear it. In fact today’s speech, I mean can you tell me one thing the president said that was any different thane said last week? I think not. I think investors heard that, sensed that policy makers are at a loss, and they sold.

GWEN IFILL: So Diane Swonk, if policy makers are busy in Washington trying to rebuild confidence in the economy and investments, does it matter what policy makers in Washington do or say?

DIANE SWONK: Well, I think it matters. There is a real fear when this whole thing initially broke down, that we would throw the baby out with the bath water because there is enormous amount of legislation when Enron first broke about how to fix the problem out of Congress. Then there sort of was a realization of not wanting to bite the hand that feeds them.

And on both sides of the aisle they all stopped in pushing through legislation, which I actually welcomed that because you can often do more damage over regulating in reaction as a knee jerk reaction than not. I think Mark is right though. Neither Congress nor the administration, nor the Federal Reserve have the tools to deal with all of the problems that are here. A lot of this is market self-regulation.

We are starting to see the very beginning of that. Mark is right. We are still dealing with the corpses floating to the top, dominating the headlines. And it will be a while before we see the full flushing out of the sort of cleaner corporate America prove itself, but it does have to prove itself. Come on — we went through a period here where investors were willing to buy on stories of, you know, phantom fairy tales in the dot-com business.

GWEN IFILL: So you think the idea of a hangover from a binge has some validity?

DIANE SWONK: Well, I think hangover from a binge has some validity. It was much easier to make profits in a much less hostile profit environment and a temptation to cheat in a hostile profit environment is much higher. So, yes, there is some validity there. I think some of it is also political finger pointing at this point in time and I don’t want to get involved in that. I think these problems are beyond the reach of Congress and the administration and as a result, finger pointing doesn’t do much good.

GWEN IFILL: So Mark Zandi, what do people who have their money in the stock market, how worried should they be that this is just a gyration that’s going to keep coming, going back and forth, or that this speaks to some really serious financial problems, economic underpinnings, long-term concerns?

MARK ZANDI: Well, if you are a trader you’ve got a problem. I mean, this market is going to be tough, I think, over the course of the next several weeks and perhaps the next several months. But if you’re an investor and have a longer run horizon, five, ten, fifteen years, this is a good time to buy. I believe the market is undervalued long run. The president is right, the economy is fundamentally very strong. We are in recovery and with a bit of luck this recovery will continue next year into next and will gain traction and we’ll feel better about things this time next year. If I were an investor, I’d hold tight.

GWEN IFILL: We are all looking for a way to feel better about things. Mark Zandi and Diane Swonk, thank you very much.

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